J.P. Morgan is filing a legal challenge against Tesla for allegedly violating a contract related to stock warrants after its share value increased.
Filing the complaint in a Manhattan federal court, the bank accused Tesla of default and demanded $162.2 million.
According to the document, J.P. Morgan bought warrants from Tesla that would pay off if the strike price was lower than the EV maker’s stock price when the warrants expired in June and July 2021.
J.P. Morgan claims the warrants lost significant value after CEO Musk tweeted in Aug. 2018 that Tesla had “funding secured” to go private at $420 a share. The ensuing volatility weighed on the stock’s price until the warrants expired in June and July 2021—with the share price well above both the original and strike prices.
After his tweet, J.P. Morgan said it downgraded the strike price and made other reverse modifications following his subsequent update that he dropped his intention 17 days later. The bank noted it was eligible to do so following “significant corporate transactions involving Tesla.”
In February 2019, Tesla accused the adjustments as “unreasonably swift and an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock.” The automaker also said it reversed its idea soon enough to make the adjustments irrelevant.
Nonetheless, Tesla did not oppose other underlying calculations and became null after the bank sent a letter defending its adjustments.
“J.P. Morgan sent Tesla a response rejecting all of its allegations with regard to the Adjustments. However, Tesla never bothered to respond to J.P. Morgan’s letter, and in fact, did not raise any further objection to the Adjustments for two years,” the complaint reads.
When the warrants expired, Tesla’s stock had increased almost tenfold, or “well above both the original and adjusted strike prices,” as the bank described, making Tesla obligated to provide shares of its stock or cash.
Yet, Tesla only settled the portion of the 2021 Warrants that were not in dispute but refused to settle in full. J.P. Morgan said the automaker did not deliver 228,775 shares of its common stock.
“Even though J.P. Morgan’s adjustments were appropriate and contractually required, Tesla has refused to settle at the contractual strike price and pay in full what it owes to J.P. Morgan.” As a result, “Tesla is in flagrant breach of its contractual obligations,” J.P. Morgan alleged.
The complaint said Tesla sold the warrants to eliminate changes of stock dilution from a separate convertible bond offering and reduce its federal income taxes.
The troublesome tweet ended with Musk and Tesla themselves each fined $20 million by the U.S. Securities and Exchange Commission.
Tesla shares were in the $50-$60 range in February and March 2018 and were between $600 and $700 by June and July 2021. Since the summer, Tesla stock has spiked another 41%, closing at $1,003 on Monday.